Mortgages to be hit by tough rules on lending
Regulator warns banks they have to cut level of risky debt
CONSUMERS will find it much tougher to get mortgages and other loans after the Financial Regulator yesterday signalled a major clampdown on bank lending.
Ireland is one of the few countries in Europe where there are no rules limiting the overall debts that a household can accumulate.
Now, however, the regulator is looking at putting mortgage lending under severe scrutiny, after warning banks and building societies that they will have to significantly reduce their levels of risky lending.
In a hard-hitting report, regulators said they would focus on the lending by banks to households. They are strongly considering imposing a cap on new lending -- especially where consumers borrow to buy a house and the mortgage represents a high proportion of the value of the property.
A limit may be put on the debts a consumer can build up by assessing the disposable income a person is left with each month after meeting mortgage and other loan repayments.
Mortgages where borrowers have a tiny deposit or none at all are also set to come under the microscope. This would spell the end of 100pc mortgages.
Controversial 100pc mortgages were popular during the boom but people taking out these types of homeloans were the first to go into negative equity, where the amount owed is greater than the value of the home.
News of the clampdown on lending came as the regulator unveiled sweeping new measures to put manners on Ireland's financial institutions.
Under the new regime:
- Banks will be forced to shut down parts of their operations if they are caught taking excessive risks.
- The regulator will take legal action against banks that breach guidelines on executive pay, which is currrently capped at €500,000 per annum.
- Financial institutions will be publicly lambasted if they fall foul of the regulator's rules.
- Bank staff will be suspended if they're deemed "unfit" to carry out certain functions.
- More than 300 extra staff will join the regulator's team and "increased numbers" of experts will be seconded in from professional services firms.
The regulator's new get-tough approach was outlined to Ireland's banks at a briefing yesterday afternoon.
Jonathan McMahon, who acts as number two to Financial Regulator Matthew Elderfield, warned that his office would "make life difficult and expensive" for banks who took a lax attitude to risk.
"Where we don't see risks being managed, we will intervene," he said. "In the most serious situations, we will stop you doing business."
Yesterday's report says there is no current regulation of credit limits, by either restricting loan-to-value mortgage limits or by assessing the amount of disposable income a person is left with after meeting mortgage repayments.
However, legislation going through the Dail at the moment is expected to give regulators powers to set lending limits.
Also being considered is the setting up of a central credit-reference agency, which would keep data on the debts of every consumer.
The regulator is also taking a tough stance on banks that ignore new guidelines on the pay and bonuses they award to executives.
Banks falling foul of the remuneration rules will be hit with "enforcement action" and may have to put more cash aside for capital, Mr McMahon warned.
Enforcement actions by the new-look Financial Regulator will also be "more public" than previous examples, most notably the hushed-up 2008 situation involving Quinn Insurance, when Sean Quinn stepped down from the board.
Some 150 staff will be hired by the regulator this year, with another "150 to 200" coming on board between 2011 and 2012, ending years of chronic understaffing at the financial watchdog.
The Central Bank will also commission reviews of governance and risk management arrangements at the major retail banks.
These will look at such issues as the skill and experience of bank board members and the range of measures banks have taken to address weaknesses in practices and processes, which were exposed during the recent banking crisis.
On corporate governance, yesterday's report says that the Central Bank will introduce, under its statutory powers, standards designed to strengthen the Irish regulatory regime.
Among other requirements, the new rules will impose a minimum number of directors, a review of board membership every three years and a clear separation of the role of chief executive and chairman.